Underinsurance: Why The Right Level Of Insurance Matters

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A critical aspect of risk management that often goes unnoticed among Australian businesses is underinsurance. In an economic landscape marked by uncertainty and unforeseen business and environmental challenges, it is imperative for businesses to comprehensively safeguard their operations. 

Yet, a concerning trend persists – roughly 80% of businesses don’t have the right level of insurance cover, exposing themselves to potentially crippling financial setbacks. 

What exactly is underinsurance? Underinsurance occurs when a business doesn’t have adequate cover to fully protect its assets in the event of a loss, damage or incident. Consequently, the business might not be able to recover in the case of one of these damaging events. 

In this article, we look at why the right level of insurance matters so you can make informed and proactive insurance decisions.

1. Financial support: the right level of insurance is important for survival 

Adequate insurance cover provides business owners with the financial protection they need when they experience a loss or damage.

For example, if you own retail stores and events such as fire or flooding occur, your property, stock, or other assets may be damaged. In order to continue operating, you may need to rent a new location while your damaged property is under renovation, a process that could take up to 24 months. You also need to replace stock and other assets, all while continuing to pay your employees. All this will put a significant strain on your cash reserves and cash flow.

With the right level of business insurance, you will receive the right amount of financial support to enable you to keep operating. This may include things like paying rent in a temporary location, buying new stock, and paying wages to your team members when you are closed

2. Compliance: the right level of insurance ensures you avoid penalties 

From an insurance contract point of view, underinsurance carries significant implications. When policyholders fail to adequately assess and insure their assets, they may find themselves exposed to substantial financial risk as a result of the “coinsurance or average clause”. 

This is a clause in an insurance policy where property is insured for ‘Replacement Value’. It often appears in policies covering buildings, equipment, business contents, inventory, and other property, and can result in penalties to the insured. 

For example, a property valued at $2,000,000 but only insured for $1,400,000 only has insurance cover for 70% of the total value of the property. 

So in the event of a claim, the coverage provided would be 70% of the claim value not 100%. This may not be sufficient to fully mitigate the loss, potentially leading to out-of-pocket expenses and financial hardship. This can be particularly devastating for businesses. 

Policies cater for ‘Replacement Value’ differently, and this is where an insurance broker adds value, ensuring you have the right policy and talking with you about how to appropriately value your assets.

3. Credibility: the right level of insurance boosts trust

Appropriate insurance cover also helps businesses demonstrate credibility and boosts trust. 

With adequate insurance cover, businesses demonstrate to clients and stakeholders that they are financially responsible and prepared for unexpected events. It demonstrates professionalism and that you take your obligations seriously. These things instill confidence and build trust. 

Currently, this is important in the construction and building industry, as nationally we are seeing many companies in this sector closing down and leaving their clients high and dry. In today’s climate, any consumer engaging a builder would be asking questions about their financial sustainability and asking to cite appropriate insurances.

Omnisure sees the benefits of insurance every day, and also hears about when the insurance cover hasn’t been fit for purpose. We strongly advise our clients to:

1. Annually review their insurance cover against their assets, operations, and the market.

2. Ensure their insurance cover meets their legal requirements.

3. Review their policies in line with legislation and industry changes.

If this sounds overwhelming, that’s where we come in. We have the expertise to help you work out what level of cover you need for your specific case.  Give us a call on 1800 958 384 or email us at hello@omnisure.com.au if you need professional insurance advice.